Nedbank Group · JSE:NED

Nedbank — Merrill Lynch Investor Lunch (June 2005)

50 slides from Nedbank's conference presentation, June 2005

1. Slide 1: Capital Management

   Capital Management Merrill Lynch Investor Lunch June 2005 Mike Brown (CFO) & Trevor Adams (Head Group Capital Management & Basel 2)

2. Slide 2: Agenda

   Agenda § New rules to the game of banking § Basel 2 implementation ­ approach § Basel 2 implementation ­ status § Basel 2 impacts § New capital management framework § Economic capital & risk appetite § Background on RAPM & cost of capital § Capital levels & targets § Integration of capital managemen

3. Slide 3: New rules to the game of banking

   New rules to the game of banking

4. Slide 4: New rules to the game of banking

   New rules to the game of banking ARISING MAINLY FROM § Basel 2 as catalyst to risk based capital requirements § Low inflationary environment § Increased competition THEREFORE, RULES ARE CHANGING REQUIRING: § Optimising risk profile of balance sheet § Optimising capital levels § Integrating risk, cap

5. Slide 5: Balance sheet optimisation

   Balance sheet optimisation Illustrative Balance sheet profitability impact analysis (Basel 2 / Economic Capital vs. Basel 1) Capital% ROE% 16% 32% 14% 28% 12% 24% 10% 20% 8% 16% 6% 12% 4% 8% 2% 4% 0% 0% High grade unsecured Speculative grade Speculative grade partly corporate loan unsecured corporat

6. Slide 6: Risk adjusted vs non-adjusted measures

   Risk adjusted vs non­adjusted measures ILLUSTRATIVE Return on a Non­Risk based Capital Measure (e.g. Basel 1), Risk­Adjusted­Performance­Measurement as is currently the case (Economic Capital / BASEL 2) RoE (%) RAROC (%) 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% ­10% ­10% ­20% ­20% ­30%

7. Slide 7: Basel 2 implementation - approach

   Basel 2 implementation ­ approach

8. Slide 8: Strategic approach to Basel 2

   Strategic approach to Basel 2 2003 ­ 2004 2003 ­ 2005 2004 ­ 2006 2005 ­ 2007 PLANNING RISK & CAPITAL RISK & CAPITAL VALUE BASED MEASUREMENT MANAGEMENT MANAGEMENT §Central Basel 2 §Credit rating tools & §Capital mngt §Capital optimisation Programme office scoring models §Credit pfolio mngt §Client v

9. Slide 9: Balance sheet risk / return

   Balance sheet risk / return BALANCE SHEET LEVEL EXAMPLES OF INITIATIVES Portfolio § Group credit portfolio model § Determine risk ‘hot spots’ § Diversification benefits into lending decisions Business Unit level § Economic capital allocation § Risk adjusted performance measurement § Review growth on

10. Slide 10: Targeted Basel 2 approaches

    Targeted Basel 2 approaches § Advanced IRB approach for credit risk § Standardised approach / Alternative Standardised approach for operational risk – Work streams underway for Advanced Measurement approach § Internal Model approach for market risk § High standards for ALM (in respect of Pillar 2) §

11. Slide 11: Risk measurement methodologies

    Risk measurement methodologies Risk Characteristics of Emerging Markets: Comparison of Aggregate Provisions – Developed and Emerging Markets: § Higher default rates Provisions/ Assets % § Higher volatility in market variables 2.00% 1.60% § Higher correlation between industries 1.20% § Lower levels o

12. Slide 12: Nedbank's Basel 2 programme

    Nedbank’s Basel 2 programme Data Credit Risk Projects covering Requirements projects "Other Major Individual Risks" Data & data Credit Intial re­rate LGD/EAD Basel 2 Cedit CPM & Credit model Operational ALM risks Market mngt Rating tools of credit framework credit Process Financial risk validation &

13. Slide 13: Basel 2 implementation - status

    Basel 2 implementation ­ status

14. Slide 14: Key Basel 2 deliverables

    Key Basel 2 deliverables DELIVERED AS AT 30 JUNE 2005 Data & Data § Significant data collection effort Management § Data systems gap analysis (SAS/IBM used) § 8 of 9 new credit rating (PD) models for coporate exposures built and in use Credit Rating Tools § 35 Retail PD, LGD and EAD models built and

15. Slide 15: Key Basel 2 deliverables (continued)

    Key Basel 2 deliverables (continued) DELIVERED AS AT 30 JUNE 2005 Group Basel 2 § New Group Credit methodology aligned with AIRB (Basel 2), completed Credit § New Nedbank Group Master Rating Scale developed & in use Methodology § New methodology already in partial use (phase – in approach) Credit Pr

16. Slide 16: Key Basel 2 deliverables (continued)

    Key Basel 2 deliverables (continued) DELIVERED AS AT 30 JUNE 2005 § Standardised Approach requirements in Basel 2 completed Operational Risk § AMA planning underway (PWC consulting) § Data collection process in place § Significantly improved ALCO process ALM Risk (incl. FTP) § Strong ALM management

17. Slide 17: Key Basel 2 deliverables (continued)

    Key Basel 2 deliverables (continued) DELIVERED AS AT 30 JUNE 2005 Basel 2 § Scoping done (includes all risk & capital MIS requirements) Reporting & Disclosure § Integrated with Group’s Financial Processing Architecture project Requirements Information § Credit process automation (25% complete) Techn

18. Slide 18: Key Basel 2 deliverables (continued)

    Key Basel 2 deliverables (continued) DELIVERED AS AT 30 JUNE 2005 ERMF & group § ERMF designed & approved in 2003 level risk § ERMF updated & fully implemented / rolled­out in 2004, including / Basel 2 policies comprehensive group­level risk policies Risk Based § RBP / CVM projects underway in all 3

19. Slide 19: Key Basel 2 deliverables (continued)

    Key Basel 2 deliverables (continued) DELIVERED AS AT 30 JUNE 2005 Change § Extension education / knowledge transfer programme underway (since 2004) at all levels (incl. Non­Executive directors) Management § Communication & documentation well advanced Costs, benefits § Cost / Benefits analysis ongoin

20. Slide 20: Key Basel 2 deliverables - remaining

    Key Basel 2 deliverables (continued) REMAINING KEY DELIVERABLES Data & Data § Data Governance Framework (by 15/12/05) Management Credit process § Complete CPR for rest of Bank (by 30/09/05) Redesign (CPR) & § Complete CPI (by 31/03/06) Implementation (CPI) Credit Portfolio § Group Portfolio Manageme

21. Slide 21: Key Basel 2 deliverables - remaining

    Key Basel 2 deliverables (continued) REMAINING KEY DELIVERABLES Market Risk § Final Investment Risk methodology (by 30/09/05) § Investment Risk methodology implemented (by 30/06/06) Capital § See later slides Requirements Information § Credit Process Automation (100%) (by 31/12/05) Technology § Coll

22. Slide 22: Key Basel 2 deliverables - remaining

    Key Basel 2 deliverables (continued) REMAINING KEY DELIVERABLES ERMF and Group § Formalise Basel 2 into Nedbank Group’s Enterprise­wide Risk level Risk / Management Framework (ERMF) (by 30/06/06) Basel 2 Policies Risk­based § Complete RBP / CVM projects in all 3 business clusters (by 31/03/06) Prici

23. Slide 23: Key Basel 2 deliverables - remaining

    Key Basel 2 deliverables (continued) REMAINING KEY DELIVERABLES Change § Ongoing Change Management Management ­Incl education, § Ongoing upskilling, resourcing, education & training documentation & § Ongoing communications communications Costs, benefits & § Ongoing costs / benefits / capabilities tr

24. Slide 24: Capital requirements - 2004

    Capital requirements ­ 2004 § Economic Capital – Methodology finalised – Bottom up calculations – Economic Capital Model built § Risk Adjusted Performance – Design, content & piloting – Business unit results discussions Measurement (RAPM) § Risk Appetite (Quantitative) – Methodology finalised – Earn

25. Slide 25: Capital requirements - 2005

    Capital requirements ­ 2005 § Economic Capital & RAPM – ECap / RAPM shadow based reporting (commenced) – Fine tune & complete minor outstanding work (by 30/09/05) § Risk Appetite – Finalise group’s target risk appetite (by 31/10/05) – Build Limit Allocation Framework (by 30/09/05) § Capital Manageme

26. Slide 26: Capital requirements - 2006

    Capital requirements ­ 2006 § Implementation of frameworks: – Economic Capital – RAPM – Risk Appetite § IT automation of related processes § Performance measurement & incentives effective from 2006 – Aligned on a RAPM basis …to be delivered in 2006

27. Slide 27: Basel 2 impacts

    Basel 2 impacts . NEDBANK

28. Slide 28: Basel 2 impacts

    Basel 2 impacts § Well positioned for Basel 2 & resultant capital requirements § However, still uncertainties: – 8% vs 10% RWA pillar 1 charge – FIRB vs AIRB accreditation – Standardised approach risk weightings – Point­in­time vs long­run data usage for retail exposures – IRB approaches for equity

29. Slide 29: Basel 2 estimated costs

    Basel 2 estimated costs TOTAL ESTIMATED COSTS Rm Non­IT 100 IT* 150 250 SPLIT AS FOLLOWS: 2003 39 (16%) 2004 84 (34%) 2005 90 (36%) 2006 37 (14%) 250 (100%) * Some integration with other major business process improvement initiatives, namely: ­ Financial Process Architecture Project ­ Enterprise­Wid

30. Slide 30: New capital management framework

    New capital management framework

31. Slide 31: New capital management framework

    New capital management framework CAPITAL MANAGEMENT FRAMEWORK BOARD OF DIRECTORS STAKEHOLDERS RISK VS RISK VS STAKEHOLDERS Clients GROUP EXCO CAPITAL RETURN Shareholders Debt­holders ADEQUACY (profitability) Analysts Rating agencies Regulators (Solvency) General public CAPITAL MANAGEMENT S PERFORMAN

32. Slide 32: Economic capital & risk appetite

    Economic capital & risk appetite

33. Slide 33: New capital management framework

    New capital management framework BASEL 2 (based on AIRB) ECONOMIC CAPITAL Pillar 1 Pillar 2 Comprehensive risk & capital assessment Rules based Subjective Bottom­up modeling Minimum capital Add buffer ­ all other material risks: Internal capital assessment of risk for: requirements for: ­Interest ra

34. Slide 34: Risk appetite metrics

    Risk appetite metrics § Based on earnings volatility model § 4 key metrics are used: – Earnings at Risk – Chance of regulatory insolvency – Chance of experiencing a loss – Economic Capital Adequacy / Implied Debt Rating …aligned with our economic capital model

35. Slide 35: Economic capital & risk appetite

    Economic capital & risk appetite . Target setting hierarchy Group Constraints / Targets Group Risk Economic Capital RoE (20%) Appetite Nedbank Nedbank Nedbank Group OM Plc Earning Volatility Corporate Capital Retail ALM ECap Economic Capital Basel 1 Business Business Business Basel 2 Units Units Uni

36. Slide 36: Background on RAPM & cost of capital

    Background on RAPM & cost of capital

37. Slide 37: Background on RAPM

    Background on RAPM Lead by other areas "New" risk­adjusted P&L Funds Transfer Pricing (Group ALM) R Lead by Group Capital Gross Income Management Division Produces NII after transfer of A/L mismatch risk to Net Interest Income Capital Benefit Group ALM taking into Capital Benefit Notional return on

38. Slide 38: Cost of Capital

    Cost of Capital As at 1 January 2005 Cost of Capital is the weighted average of the cost of the two equity components: ordinary & preference shares (“WACC”) Weighting Cost WACC Cost of ordinary shares (after tax) 83% 14.2%* § Capital Asset Pricing Model (CAPM)* Cost of preference shares 17% 8.25% §

39. Slide 39: Capital levels & targets

    Capital levels & targets . NEDBANK

40. Slide 40: Capital levels & targets

    Capital levels & targets § Capital levels & planning is assessed across 5 dimensions: – Regulatory (Basel 1) – local (SA) & international (small) – Regulatory (Basel 2) – Economic Capital (Rating Agencies capital) – Statutory Capital (basis for ROE to 2007) – Buffer Capital § Current regulatory (Bas

41. Slide 41: Capital levels & targets (continued)

    Capital levels & targets (continued) § Foreign capital requirements – Reduced to US$ 342m equivalent – 2005 strategic planning process will finalise offshore requirements § Current dividend policy: 3 ­ 3.5x cover on headline earnings § Capital optimisation to receive strong focus in H2 2005 onwards

42. Slide 42: Integration of capital management into strategy

    Integration of capital management into strategy

43. Slide 43: Integrating capital management into strategy

    Integrating capital mngt into strategy GROUP RISK COMMITTEE BOARD OF DIRECTORS GROUP REMUNERATION COMMITTEE (Board sub­committee) (Board sub­committee) GROUP CAPITAL MANAGEMENT DIVISION GROUP EXCO RISK­ADJUSTED PERFORMANCE MEASUREMENT (RAPM) PROCESS ALCO & GROUP HR EXECUTIVE OPCOM COMMITTEE RISK (Gr

44. Slide 44: Capital - key strategic actions

    Capital – key strategic actions § Economic capital allocation & § Client value mngt RAPM § Risk based strategic planning § Reduce / optimise risk profile of § Integration of risk, capital & balance sheet strategy, linked to performance § Client selection improvement § Risk adjusted profitability ­ §

45. Slide 45: Summary & conclusion

    Summary & conclusion . NEDBANK

46. Slide 46: Summary

    Summary § Proactively responding to “the new rules to the game of banking” § Significant progress made & on track for Basel 2 § Basel 2 impacts – pending SARB decisions before concluding § Significant enhancements around Capital Management – New dedicated Group Capital Management function ­ advanced

47. Slide 47: Conclusion

    Conclusion WINNERS LOSERS § Banks that see Basel 2 as a § Banks who see Basel 2 as a means to change compliance exercise – Embrace ‘best practice’ – Fail to address portfolio management science economics – Address portfolio economics – Fail to improve transparency – Increase transparency § Late star

48. Slide 48: “There is no miracle moment. Small incremental wins in one common direction will restore

    “There is no miracle moment. Small incremental wins in one common direction will restore Nedbank Group to a highly rated & respected financial institution.”

49. Slide 49: Questions?

    Questions? . NEDBANK

50. Slide 50: Thank you

    Thank you . NEDBANK

Nedbank Group — Merrill Lynch Investor Lunch (June 2005) on 6ix